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In re Westover Inc.

March 2, 1936

IN RE THE WESTOVER, INC.


Appeal from the District Court of the United States for the Southern District of New York.

Author: Chase

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

CHASE, Circuit Judge.

The appellants are the trustees of the Prudence Company, Inc., itself a corporation being reorganized under section 77B of the Bankruptcy Act (11 U.S.C.A. ยง 207). The issues here involved have arisen out of transactions which may be summarized as follows:

The Westover, Inc., the corporate debtor in these proceedings, acquired the title in fee to a parcel of land located at 253-263 West Seventy-Second street in New York City subject to several mortgages given by former owners in the aggregate principal amount of $1,300,000. On August 12, 1926, the debtor executed an additional mortgage on the premises in the principal amount of $100,000. All of these mortgages were merged in a consolidated first mortgage in the principal amount of $1,400,000 by agreement between the debtor and the Prudence Company, Inc., which purchased the mortgages with its own funds. Afterwards, and on February 10, 1927, the Prudence Company, Inc., assigned these mortgages, so consolidated, together with the bonds secured by them, to Prudence-Bonds Corporation, which is also being reorganized under section 77B. It will be convenient to refer hereafter to these bonds and mortgages simply as the mortgage. Prudence-Bonds Corporation paid nothing for the assignment. It was wholly controlled by stock ownership by the same interests which owned all the stock of the Prudence Company, Inc., and took the assignment in furtherance of an arrangement between the Prudence Company, Inc., and itself whereby it would issue participating certificates in the mortgage to be delivered by it to the Prudence Company, Inc., for sale to the investing public. In carrying out this arrangement Prudence-Bonds Corporation did issue such certificates to an amount $177.22 less than the principal sum of the mortgage and delivered them to the Prudence Company, Inc. The latter company then sold all of such certificates except $23,400 in face value which it retained and the appellants now hold as its trustees. When the certificates were issued by Prudence-Bonds Corporation, it delivered the consolidation agreement, all mortgages, bonds, and documents relating thereto to the Manufacturers Trust Company in New York as depositary merely. The debtor never assumed personal liability under the mortgage; nor did Prudence-Bonds Corporation assume any liability for the payment of the certificates it issued.

The Prudence Company, Inc., executed its written guaranty of the payment of the mortgage and this guaranty was one of the documents deposited with Manufacturers Trust Company. The certificates bore a short resume of its undertaking and a reference to the guaranty in the possession of the depositary.

Each certificate took the form of an assignment of an undivided equal share in the bonds and mortgages consolidated. It read, in part: "Prudence-Bonds Corporation, hereinafter called the 'corporation'; has received from //--, hereinafter called the 'registered owner,' /--- for the purchase of, and hereby assigns to the registered owner, an undivided share equal to that amount due //--, 19 --, with interest at the rate of five and one-half per centum per annum, in the bonds of 253-263 West 72d Street Corp., in principal amount $1,400,000.00 and in the mortgages securing the same, which are consolidated into one first mortgage and payment extended, covering premises situated on the north side of West 72nd Street, 100 feet east of West End Avenue, Borough of Manhattan, City and State of New York."

There followed a statement of the semiannual interest due dates; a restriction in the amount of certificates outstanding at any time to the amount of the principal of the mortgage; and a provision making all certificates equal in rank for the purposes of participation.

Certain conditions were set forth which will be noted in so far as they are now relied upon: (1) The depositary held all documents for the benefit of all parties in interest. (2) The Prudence-Bonds Corporation and the Prudence Company, Inc., either or both, were irrevocably authorized to collect all moneys payable upon the bonds and mortgages deposited; to credit such payments, and in its own name to satisfy or assign a mortgage upon full payment thereof; to account to the registered owner for his share of the principal and interest at the rate of 5 1/2 per cent.; to retain any balance of moneys collected; to take any action necessary to protect the security; and in its own name to foreclose or otherwise enforce the provisions of any of the instruments relating to the mortgaged premises. (3) Prudence-Bonds Corporation, with the consent of the Prudence Company, Inc., had the power to waive or modify any of the provisions of any instrument, provided that in the judgment of Prudence-Bonds Corporation the security was not impaired and provided further that the Prudence Company, Inc., "shall not be released in any event from paying this certificate in accordance with the terms hereof."

On the back of each certificate appeared the following signed by the Prudence Company, Inc.:

"The Prudence Company, Inc., hereby certifies and guarantees to the holder of the within certificate that it has guaranteed payment of the interest on the bonds and mortgages within mentioned when due, and payment of the principal thereof when due or within eighteen months thereafter, together with interest thereon after maturity at the same rate until payment of principal is offered, by the guarantee referred to within and now in the possession of the Depositary.

" The Prudence Company, Inc., further certifies and guarantees that the interest of the holder of the within certificate in said bonds and mortgages is not subordinate to any other shares thereof and is not subject to any prior interest therein. By the acceptance of this certificate, the holder hereof agrees to the terms and conditions of said guarantee."

This debtor had not paid all of the interest and principal due on the bonds and mortgages covering the real estate, and the Prudence Company, Inc., was in default in the performance of its undertaking as above set forth when the 77B petitions for the reorganization of each of them were filed. After this debtor so failed to pay, and on March 9, 1932, it forestalled foreclosure by giving Prudence-Bonds Corporation, in accordance with an agreement it made with the Prudence Company, Inc., as additional security for the mortgage, a chattel mortgage for $1,134,784.02, upon the furniture and fixtures in a hotel standing upon the premises and a third mortgage for $25,000 upon an adjoining parcel of land. This third mortgage contained a covenant of payment by this debtor. This additional security, however, is mentioned only in passing, as no payments have been made upon these mortgages and as their execution and delivery in no way effect the issues here they will be treated merely as collateral security given by the debtor for the payment of the consolidated mortgage upon its property.

On February 14, 1935, this debtor, having been continued in possession of its property, proposed a plan of reorganization. On May 14, 1935, the appellants, claiming as trustees of the Prudence Company, Inc., to be creditors, filed objections and on May 22, 1935, filed two claims. One of these claims was for the sum of $1,260,419.61, which was made up of $1,134,784.02 due on the principal of the consolidated mortgage when the debtor's petition was filed, $88,037.30 interest, $32,035.87 for tax deposits, and $5,562.42 for payments to be made in lieu of income taxes. The other was a claim for $177.22 ...


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